Breaking Down Currency Trades
Forex stands for foreign exchange, but I’m not talking about students here.
Instead, I want to help you learn how to take advantage of forex trading just like you would when trading stocks.
In fact, forex works a lot like the stock market. The only difference on the surface is that you’re trading currencies instead of shares.
Another difference lies in volume. On most days, trading volume exceeds $5 trillion. It’s a highly liquid investment pool, which appeals to many investors.
But what is forex trading? And how can you take advantage of opportunities in the market?
You might know that I’m partial to penny stocks, but I’ve also researched many other types of investment vehicles. Each has its own unique set of rules, expectations, and risk levels, so I urge you to learn about them all.
Today, I’ll cover what you need to know about forex trading.
What is Forex Trading?
Forex trading, often abbreviated FX, is a global marketplace in which each of the world’s currencies can be traded based on their buying and selling price.
The spread — the difference between the buying and selling prices — can be infinitesimal because of the micro changes in currency prices.
If you’ve ever traveled internationally, you understand currency exchange. For instance, when you travel from the United States to Japan, you exchange your U.S. dollars for Japanese yen. Currently, $1 is equal to 109.87 yen.
Currencies on the forex market are traded in pairs. You’ll see the abbreviation for the currency you’re buying next to the abbreviation for the currency you’re selling.
Let’s say, for instance, that you’re trading the euro for the Canadian dollar. The pair would look like this: EURCAD. EUR stands for the euro and CAD stands for the Canadian dollar.
Since forex trading is a highly liquid investment opportunity, trades can happen in fractions of a second. In other cases, buyers hang on to their investments while they wait for a positive swing based on their position.
What is the Forex Market?
Forex trading occurs on the foreign exchange market. Like penny stocks, the forex market is completely decentralized. Investors execute trades over-the-counter (OTC) electronically.
The market remains open 24 hours a day because when the market closes in one geographic region, it opens in another.
Consequently, it’s an extremely exciting market to watch. Price quotes can change dramatically no matter the time of day, and investors can act quickly when they want to execute a trade to take advantage of a price shift.
How Does Forex Trading Work?
You’ve heard me talk about how much I dislike leverage, but leverage is how the forex trading market works. Because of its high liquidity, brokers allow investors huge leeway when it comes to executing trades.
For instance, if your broker sets 200:1 trading leverage, you would only have to put up $5 of your trading account money for a $4,000 trade.
Remember that leverage can prove dangerous.
While it might sound like a sweet deal when you want to take advantage of a big expected swing in the forex trading market, you could easily lose considerable funds, especially if you’re using more leverage than you have in your trading account.
Keep meticulous records on your trades so you don’t overextend yourself on any single trade (or on any ongoing trades simultaneously).
Just like in the stock market, price quotes are based on supply and demand. As one currency becomes devalued next to another, you have an opportunity to capitalize on the discrepancy.
An executed trade is called a settlement and is carried out in cash. If you’re selling a currency to someone else, you get the agreed-upon value of the currency’s value based on how much of it you agreed to buy.
How to Start Forex Trading
If you want to begin forex trading, you need an account with a broker. There are numerous brokers online who handle the forex market, but I recommend signing up for free demos with several of them to get a feel for how they operate.
It’s also a good idea to read tons of online reviews. Figure out what people are saying about those brokers before you make a firm decision.
You have to apply with a broker to get an account. The broker will want to know lots of information about you, from your name, address, and phone number to your employment status, net worth, and trading goals.
All of this information will tell the broker whether or not you’re a good fit. It’s also the law in many places for brokers to collect this information, so if it feels invasive, understand that it’s a normal part of the process.
Once you have an account, you can begin trading.
There are some key strategies for you to know if you’re going to dip your toes in forex trading.
I’ve got a list to go over with you tomorrow. So stay tuned.
Editor, Penny Stock Millionaires